Jump To Section
What Is an Upfront Cost?
An upfront cost is an initial sum of money owed in a purchase or business venture. Perhaps the most common iteration of upfront costs is the package of fees owed by home buyers. These out-of-pocket costs, which include a down payment and various closing costs, occur before a home buyer can take title on a piece of property.
Why Is Understanding Upfront Costs Important?
By fully understanding upfront fees, along with ongoing costs like monthly mortgage payments and property taxes, a new homeowner can confidently select a piece of property appropriate for their financial situation. Since the expenses of home ownership go beyond the listed purchase price, a responsible real estate agent will talk their client through the different amounts they will owe to ensure that the buyer is not caught off-guard by high upfront costs.
8 Types of Upfront Costs
As you prepare to purchase of a new home, be mindful of the following upfront costs:
- Initial deposit: In order to submit a formal offer, most sellers require buyers to place a cash deposit in an escrow account. This indicates a serious offer, and the deposit will apply toward the total purchase price. If negotiations break down, the deposit can return to the buyer.
- Down payment: Expect to make a cash payment of at least 20 percent of the total purchase price in order to secure financing from a bank or other commercial lender. The greater your down payment, the lower the loan amount, which means less money paid in interest.
- Home inspections: During an escrow period following an accepted offer, expect to pay a home inspector to assess the structure you're about to purchase. Do not skimp on home inspections; they can save you thousands if you catch problems and negotiate to cover the costs of fixing them.
- Taxes: In some states, high upfront costs can come in the form of government fees and taxes. In the state of New York, for example, home purchases may be subject to a 2.7 percent transfer tax. Other states do not levy transfer taxes but may charge other fees for registering property deeds.
- Escrow fees: To safely purchase a home, you must make use of an escrow company, which charges a fee for holding and distributing purchase funds.
- Insurance: Most commercial lenders require that borrowers obtain homeowners' insurance and private mortgage insurance before their closing date.
- Legal fees: A real estate attorney can help you ensure that the purchase agreement, title documents, and other contracts are handled appropriately.
- Realtor commission: While the buyer is responsible for all aforementioned upfront costs, the seller pays a realtor's commission unless otherwise negotiated.
Get the MasterClass Annual Membership for exclusive access to video lessons taught by masters, including Bob Iger, Sara Blakely, Paul Krugman, Robin Roberts, Chris Voss, and more.